The Impacts of Firms' Voluntary Disclosures on Their Stakeholders

Abstract

Using a large sample of management earnings forecasts reports (MEFRs), I examine the impacts of firms' voluntary disclosures on their stakeholders. Management earnings forecast report is the most widely used proxy for voluntary disclosures in the recent literature. It is typically issued by managers through press releases. These releases typically contain not only earnings forecasts, but also provide information on firm performance and supplementary information on important firm changes, risks, and segment profitability. Motived by the newly emerging qualitative (i.e. textual) research of financial disclosures, this paper focus on the qualitative attributes of MEFRs, including qualitative information quality (e.g. readability) and qualitative information content (e.g. tone). Furthermore, this paper extend the scopes of this stand of research to the effects of qualitative attributes of voluntary forward-looking disclosures on other stakeholders.
Specifically, this paper examine the hitherto unexplored question of whether, how, and to what extent the qualitative information quality and content of major customer's forward-looking disclosures, in the form of (unaudited) discretionary, unstructured, and discretionary management earnings forecast reports (MEFRs), affect their suppliers' operations planning and future performance, after controlling for the quantitative information quality and content of customers' MEFRs.
First, I find that suppliers' future performance in year t+1 is positively and significantly associated with the qualitative information quality (readability) of MEFRs issued by their major customers in year t, after controlling for the quantitative quality/content of these reports, the historical accounting quality, and firm complexity of the customer, as well as other supplier and customer characteristics; Second, I find that suppliers' future performance in year t+1 is, in general, positively and significantly associated with qualitative information content (tone changes) in MEFRs issued by their customers in year t, after controlling for both qualitative quality and quantitative quality/content of these reports, as well as other supplier and customer characteristics; Third, the positive association between suppliers' performance in year t+1 and tone changes in customers' management earnings forecast reports in year t is significantly stronger for customers with more readable forecast reports.
I interpret the findings in this paper to draw the following conclusions. First, the extent to which firms' discretionary and forward-looking disclosures are useful to firms' suppliers as complementary sources of information varies in accordance with both the qualitative information quality/content and the quantitative information quality/content of these disclosures. Second, the extent to which the qualitative content of firms' discretionary forward-looking disclosures is information-relevant to suppliers varies in accordance with the qualitative information quality (readability) of these disclosures. Third, qualitative and quantitative disclosures are two distinct but complementary modes by which a firm coveys information to outsiders.

Date of Award	8 Jun 2016
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Hao ZHANG (Supervisor)